When thinking about managing your money and planning for your future, most people focus on how much they take home from their job or business.
But our clients know the truth about income: it’s not an accurate measure of your financial health.
How much you make, and how much you spend, is an important aspect of building a stable financial life. But putting emphasis only on those two pieces of your money puzzle can spin you in the wrong direction.
That’s where net worth comes in – it’s a true measure of your financial health.
And that’s why it’s critical to know how to calculate it.
But first – what is it?
Your net worth is simply what’s leftover after subtracting all of your debts or liabilities from your assets. It’s a simple calculation, but requires a little bit of research and time on your part.
Why is it so important? A significant income is great, but if you have a large amount of assets with an equal amount of debt, your net worth will be zero. That makes it nearly impossible to achieve your financial goals, but you may not know that if you’re just focusing on income, for example.
So, how do you calculate net worth by hand?
First, make a list of all of your assets with its current value. That means everything from your checking and savings accounts, retirement savings, home(s) and automobile(s), stocks and bonds, and anything else that has significant value to you.
Then, add it all up.
Second, make a list of all of your liabilities. This includes credit card balances, car and mortgage payments, student loan debt and anything else you might owe. Then, total all of that.
Finally, subtract your debts from your assets to calculate your current net worth.
(Want an easier way to calculate net worth? Try our proprietary Net Worth Calculator App, which updates your net worth in real time.)
The higher your net worth is, the more stable your financial health is and the closer you are to achieving your financial goals.
Note: If you’re young, your net worth is likely low or even negative because of the weight of first-time debts like a first house, first car and student loans. It’s important to understand the difference between normal borrowing and over-borrowing, and how those debts will be paid off over time.
Now that you’ve done the calculation, you may be asking yourself an important question: how do I increase my net worth?
Increasing net worth is simple: either increase your assets or decrease your liabilities, or both.
Now might be the time to focus on repaying debts, consumer debt being the most important because of the higher interest rates. It’s also important to be contributing to assets that will increase in value over time, like your retirement portfolio and investments.
Want a deeper look into your financial health? Talk to a trusted financial advisor on how to best increase your net worth for your age, income level, lifestyle and financial goals.
Jarrod Adams Investing
10130 Perimeter Parkway
Charlotte, NC 28216